Trading Strategy: Sell Relative Weakness

Another opposite strategy, this one is similar to the buy relative strength. We do not wait for a rally in a downtrend, but choose the strongest downtrending security by a process of refinement. If you remember, one of the observations of technical analysis is that prices tend to fall more quickly than they rise. This means you potentially have a greater opportunity for profit by pursuing a short position. The steps are –

  • establish that the market is going down
  • check that the sector is going down
  • make sure the particular financial security is going down

Once again, you’re looking for the extreme performer, or in this case an underperformer. You are at liberty to choose any of the securities that are losing value, following your initial appraisal, so make sure you have selected a really bad stock compared to its companions in the market sector.

  • check the strength relative to other securities
  • calculate trade size and stoploss
  • enter trade short
  • exit trade if failed or on profit

Even if you are confident that you have picked a real “dog”, you can never be sure that it will not turn around once you place your trade. Therefore you must comply with the factors and levels that you have back tested on this trading strategy, and use your technical analysis knowledge to set target and failure levels so that you can verify there is a good risk/reward ratio.

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